US Federal Budget Structure: Where Citizens’ Taxes Go
The U.S. federal budget is a comprehensive financial plan that outlines the government’s priorities and details how tax revenue from citizens is allocated to various programs and services. In fiscal year 2023, the federal government spent approximately $6.16 trillion while taking in $4.47 trillion, resulting in a deficit of $1.69 trillion. This article examines the structure of the U.S. federal budget, focusing on how people’s taxes-primarily individual income and payroll taxes-are spent. We provide detailed data, statistics, and visual aids to clarify the allocation of funds, all drawn from official government documents.
Overview of federal revenues: Where the Money Comes From
The federal government’s revenue comes primarily from taxes, with over 97% of revenue in 2023 coming from tax collections. The breakdown of revenue sources for fiscal year 2023 is as follows:
- Individual income taxes: $2.2 trillion (49% of total revenues)
- Payroll taxes (Social Security and Medicare): $1.6 trillion (37%)
- Corporate income taxes: $420 billion (9.4%)
- Sales and Excise Taxes: $76 bn (1.7%)
- Customs duties: $80 billion (1.8%)
- Other sources (e.g., Federal Reserve earnings, fees): $80 billion (1.8%)
Individual income taxes and payroll taxes together account for 86% of federal revenues, making them the backbone of government funding. Individual income taxes are progressive, with higher earners paying a larger share. In 2021, the top 5% of earners (income over $253,000) will pay 66% of all income taxes, while the top 10% (income over $170,000) will pay 76%. The payroll taxes that fund Social Security and Medicare are levied on wages, with workers and employers each contributing 6.2% for Social Security (up to a cap of $176,100 in 2025) and 1.45% for Medicare (no cap).
The reliance on individual taxes reflects the structure of the U.S. tax system, which differs from other OECD countries in that it relies more heavily on personal income taxes (45.3% of total tax revenue in 2022) than on consumption or social insurance taxes.
Federal spending: Where Taxes Go
Federal spending falls into three main categories: mandatory spending, discretionary spending, and net interest on the national debt. In 2023, the $6.16 trillion budget was allocated as follows:
- Mandatory spending: $3.8 trillion (61% of the budget)
- Discretionary Spending: $1.7 trillion (26%)
- Net interest: $659 billion (11%)
Below, we break down each category and detail how citizens’ taxes are spent.
1. Mandatory spending (61% of the budget, $3.8 trillion)
Mandatory spending is governed by permanent law and does not require annual congressional approval. It includes entitlement programs such as Social Security, Medicare, and Medicaid, which are driven by eligibility rules and demographic factors such as an aging population. In 2023, mandatory spending accounts for the largest share of the budget.
Major Programs:
- Social Security: $1.35 trillion (22% of total budget)
- Provides retirement, disability, and survivor benefits to 51.5 million retirees (average monthly benefit of $1,922 in 2024), disabled workers, and dependents. Funded primarily by payroll taxes, Social Security faces long-term challenges, with projections of trust fund exhaustion by 2035 unless reforms are enacted. Medicare: $848 billion (14% of total budget)
- Provides health insurance for 67 million Americans, primarily those aged 65 and older. In 2022, spending per beneficiary will average $16,000. Medicare is financed by payroll taxes, premiums, and general revenues.
- Medicaid and CHIP: $608 billion (10% of total budget).
- Medicaid provided health coverage or long-term care to 93.9 million low-income people in March 2023, although enrollment dropped to 82.8 million in March 2024 after pandemic-era protections expired. CHIP supports low-income children.
- Income Security Programs: $802 billion (13% of total budget)
- Includes programs such as the Supplemental Nutrition Assistance Program (SNAP), unemployment insurance, and refundable tax credits (e.g., Earned Income Tax Credit). These programs provide assistance to individuals and families facing economic hardship.
- Other Mandatory Programs: $192 billion (3% of total budget)
- Includes federal employee retirement benefits and smaller programs such as farm subsidies.
Mandatory spending has grown from 45% of the budget in 1980 to 61% in 2024, driven by rising health care costs and an aging population.
2. Discretionary Spending (26% of the budget, $1.7 trillion)
Discretionary spending is authorized annually by Congress through appropriations bills and is divided into defense and non-defense categories. In 2023, discretionary spending supported a wide range of government functions.
Key areas:
- National Defense: $816 billion (13% of total budget)
- Funds military operations, personnel, equipment, and research. Defense accounts for nearly half of discretionary spending and includes the Department of Defense, military compensation, and related agencies.
- Veterans’ Benefits and Services: $308 billion (5% of total budget)
- Supports 18 million veterans, including 2 million retired career military personnel, through disability payments, medical care, and pensions.
- Transfers to states: $1.09 trillion (18% of total budget)
- Funds state-administered programs such as education, transportation, and housing. In 2023, $81.5 billion will go to infrastructure, including highways and transit.
- Education: $309 billion (5% of total budget)
- Supports K-12 education, higher education, and student aid programs. Education spending increases significantly in 2024.
- Transportation and Infrastructure: $126 billion (2% of total budget)
- Funds highways (44%), aviation (23%), rail/transit (22%), and water infrastructure (10%). The Infrastructure and Jobs Act of 2021 added $110 billion annually through 2026 for public works.
- Other non-defense programs: $141 billion (2% of total budget).
- Includes environmental protection, administration of justice, and trade. For example, $35.1 billion will be spent on environment and natural resources in 2023.
Discretionary spending has declined as a share of the budget over time, from 40% in 1980 to 26% in 2024, as mandatory spending has grown.
3. Net interest on the national debt (11% of the budget, $659 billion)
Net interest payments cover the cost of servicing the federal debt, which exceeds $32 trillion in 2023. In 2023, interest payments total $659 billion, rising to $949 billion in 2024 due to higher interest rates and growing debt. Interest payments are non-discretionary and compete with other spending priorities. As the debt grows-predicted to reach 116% of GDP by 2034-interest costs are expected to increase, further straining the budget.
How taxes affect spending: A Per-Dollar Perspective
To illustrate how each tax dollar is spent, the following breakdown shows the approximate allocation of a U.S. tax dollar in 2023, based on budget data:
- Social Security: 22 cents
- Medicare: 14 cents
- Medicaid/CHIP: 10 cents
- National Defense: 13 cents
- Income security: 13 cents
- Net interest: 11 cents
- Veterans benefits: 5 cents
- Transfers to states: 8 cents
- Education: 2 cents
- Transportation: 2 cents
- Other (e.g. trade, environment) 4 cents
This distribution highlights the significant portion of tax dollars that go to entitlement programs and debt service, with smaller shares going to discretionary programs like education and transportation.
Table: Federal Budget Allocation (2023)
| Category | Amount ($ Trillion) | % of Budget | Key Programs |
|---|---|---|---|
| Social Security | 1.35 | 22% | Retirement, disability, survivor benefits |
| Medicare | 0.848 | 14% | Health insurance for seniors and disabled |
| Medicaid/CHIP | 0.608 | 10% | Health coverage for low-income individuals |
| National Defense | 0.816 | 13% | Military operations, personnel, equipment |
| Income Security | 0.802 | 13% | SNAP, unemployment, tax credits |
| Net Interest | 0.659 | 11% | Interest on federal debt |
| Veterans’ Benefits | 0.308 | 5% | Disability payments, medical care for veterans |
| Transfers to States | 1.09 | 18% | Education, transportation, housing |
| Education | 0.309 | 5% | K-12, higher education, student aid |
| Transportation | 0.126 | 2% | Highways, air travel, rail, water infrastructure |
| Other | 0.141 | 2% | Environment, justice, commerce |
| Total | 6.16 | 100% |
Critical Analysis: Challenges and Implications
The structure of the federal budget reveals several key challenges:
- Rising Mandatory Spending: The growth of Social Security, Medicare, and Medicaid, driven by an aging population and healthcare costs, crowds out discretionary spending. By 2034, mandatory spending and interest payments are projected to consume nearly all federal revenue, leaving little for other priorities.
- Growing Debt and Interest Costs: With the national debt at $32 trillion and interest payments rising to $949 billion in 2024, debt servicing is a significant burden. The Congressional Budget Office (CBO) projects debt will reach 116% of GDP by 2034, increasing fiscal risks.
- Tax Burden Distribution: The progressive income tax system places a heavy burden on high earners, with the top 10% paying 76% of income taxes. However, payroll taxes are regressive, as they cap Social Security contributions, affecting middle- and lower-income workers disproportionately.
- Sustainability Concerns: The Social Security Trust Fund faces depletion by 2035, and Medicare’s trust fund is projected to be insolvent by 2036 without reforms. These challenges require difficult choices, such as benefit cuts, tax increases, or program restructuring.
Citizens’ taxes primarily fund programs that provide direct benefits, such as Social Security, healthcare, and income support, but a growing portion is diverted to interest payments, reducing funds available for investment in infrastructure, education, or innovation.
Sources
- Congressional Budget Office: The Federal Budget in Fiscal Year 2023: An Infographic – https://www.cbo.gov/publication/59932 – This infographic provides a visual summary of federal revenues, outlays, and the deficit for fiscal year 2023. It was used to verify total spending ($6.16 trillion), revenue ($4.47 trillion), and deficit ($1.7 trillion) figures, as well as the breakdown of mandatory and discretionary spending.
- U.S. Treasury Fiscal Data: Federal Spending Overview – https://fiscaldata.treasury.gov/americas-finance-guide/federal-spending/ – This page details federal spending categories, including mandatory and discretionary outlays. It provided data on spending by program (e.g., Social Security, Medicare) and insights into obligations versus outlays for 2023.
- USAFacts: 2024 Current State of the Union: US Federal Budget – https://usafacts.org/state-of-the-union/budget/ – This report offers nonpartisan data on 2023 federal revenue ($4.47 trillion), spending ($6.16 trillion), and per-person spending metrics. It was used to cross-check budget totals and infrastructure spending details, such as $81.5 billion transferred to states.
- Office of Management and Budget: Historical Tables – Budget of the United States Government, Fiscal Year 2025 – https://www.whitehouse.gov/omb/budget/historical-tables/ – These tables provide detailed historical data on federal receipts, outlays, and deficits. They were used to confirm revenue sources (e.g., 49% from individual income taxes) and spending by function for 2023.
- Center on Budget and Policy Priorities: Policy Basics: Where Do Our Federal Tax Dollars Go? – https://www.cbpp.org/research/federal-budget/where-do-our-federal-tax-dollars-go – This article breaks down federal spending by category for 2024 but includes 2023 data references. It provided details on program-specific spending, such as Social Security ($1.5 trillion in 2024) and Medicaid enrollment (93.9 million in 2023).
